Crony Capitalism Watch

The Next Solyndra: DOE Proposing Massive Energy Subsidies

Rick Perry retains his weakness for crony capitalism.

Energy Secretary Rick Perry has come up with a proposal for nuclear energy and coal that would make the Obamacrats “who cooked up the famously botched bailout of defunct solar-panel manufacturer Solyndra blush.”

That’s according to Mark Perry, the American Enterprise Institute scholar and University of Michigan economics professor, writing in U.S. News last week:

Washington, D.C. has a funny, if not sad, way of changing the way folks think and act. Many officials ride into town with clear eyes and deeply rooted market-based principles only to have their outlooks fundamentally — and often rapidly — changed.

Case in point: Rick Perry, the outspoken energy secretary who served as the governor of Texas for 14 years, has stated firmly that his agency and the Trump administration “are not here to pick winners and losers,” adding that “the market can pick winners and losers.”

However, less than a year in the job, Secretary Perry appears to have come under Washington’s spell.

Perry is wrong about R. Perry, but he’s right about the policy.

Rick Perry was a very good governor of Texas in most respects, but he had a weakness for crony capitalism, which we discussed in 2014 in an ill-fated cover story for this magazine (it was the first issue that didn’t make it to the printer, after TAS went all-digital to save money).

As governor, Perry convinced the Legislature to put almost $1 billion at his disposal in two economic development accounts — slush funds, really — called the Texas Enterprise Fund and the Texas Emerging Technology Fund. He’d use that money to provide sweeteners to companies looking to relocate to Texas. This allowed him to take credit for the state’s robust record of job creation, even as studies found it had almost no effect on the economy.

In much the same way, Perry’s new proposal will allow the Trump Administration to take some credit with coal interests — voters in swing states as much as the business interests that fund campaigns. Whether it goes into effect or not, the administration has a new talking point for voters in Ohio, Pennsylvania, and West Virginia.

Perry isn’t proposing to undo some of the Obama-era anti-coal environmental regulations — that’s not his jurisdiction, anyway. But he’s pushing the same sort of heavy-handed market intervention, just in the opposite direction, calling for a total subsidy by ratepayers for all costs involved in nuclear and coal-fired power generation.

The plan has been denouncedasagiveaway by policy experts and journalists from across the political spectrum. One analyst called it the energy equivalent of “Cash for Clunkers,” estimating that it would create some $88 billion in new subsidies, seven times more than the federal government spends subsidizing renewable energy.

Perry has defended the proposal by insisting that “there is no free market in the energy industry,” but this is nonsense. The retail and distribution side of the business is still conducted under the regulated utility model in most of the country, but power generation was successfully deregulated in the 1990s and 2000s across the country. Now, roughly two-thirds of the market enjoys prices driven by competition among producers.

Perry proposes putting an end to that in the name of grid reliability.

At present, prices are set by auction. The producers offer bids covering their capacity and cost. The utilities cobble together those bids until they’ve got all the capacity they need to meet consumer demand, and they pay all their suppliers the same “clearing price” that they pay their high bidder. This ensures both reliability and price competition.

Perry’s proposal would be to require utilities (and by extension, consumers) to buy electricity from coal- and nuclear-powered generators, covering all of their marginal and fixed costs, plus a guaranteed profit, no matter how uncompetitive the producers are.

It’s up to the Federal Energy Regulatory Commission to decide whether to act on the proposal, in whole or in part. Two of the three commissioners are Trump appointees, but only Chairman Neil Chatterjee, a former advisor to Senate Majority Leader Mitch McConnell, has spoken favorably of the idea. Commissioner Robert Powelson has promised that FERC “will not destroy the energy marketplace,” while Commissioner Cheryl LaFleur, an Obama holdover, has endorsed his view.

Although the Obama administration targeted coal, it is cheap and abundant natural gas that has made other forms of energy production uncompetitive. Those older plants still have value, of course, as extra capacity can become necessary during heat waves, cold shocks, and other extreme weather events.

However, the giant coal piles favored by Perry are susceptible to rain and cold. During the Polar Vortex of 2014, they froze over, and during Hurricane Harvey, they got soaked, rendering them temporarily useless.

More importantly, the market is already able to price the value of excess capacity, and Perry’s own department has deemed the power grid more reliable than ever. If the federal government incentivizes overproduction, it could drive prices down, creating more demands for subsidy. Or it could drive more efficient producers out of business, raising prices for consumers.

Either way, as former FERC Chairman Jon Wellinghoff said, “this would blow the market up.”